Blockchain is the new buzzword of the accounting world — and for good reason. This technology represents a new area of expansion for accounting. But what is blockchain accounting? How does it pertain to companies? And what does it mean for the future of accounting and auditing? This in-depth guide will break these questions down and answer them in detail.
If you’re an accountant concerned about the future of blockchain technology, don’t worry. This is a brilliant new technology, but there will still be plenty of work for current accountants, auditors, and financial professionals.
What Is Blockchain Technology?
Blockchain is a new and fascinating area of data storage. In its most basic form, blockchain is a distributed (decentralized) ledger of transactions that grows over time.
The decentralized nature of blockchain is what gives it its unique characteristics. Think of the blockchain as an open, transparent record of every transaction that has ever occurred in the chain. Every peer (individual user) on the chain maintains a copy of the entire ledger at all times. And all changes to the chain are final.
While the uses of blockchain vary, the most popular is in the world of virtual currencies. Attempts at creating digital currencies date back to the early 1990s, but it was not until the rise of Bitcoin (BTC) in the late 2000s that virtual currencies became mainstream.
Blockchain Outside of Cryptocurrency
Blockchain technology is often synonymous with cryptocurrency. However, it’s important to note the distinction between the two. The historic problem with cryptocurrency was the inability to always verify transactions as legitimate — after all, (in theory), anyone could falsify virtual currency data. The development of true blockchain technology solved that issue.
In the context of virtual currency, blockchain exists as a way to authenticate digital transactions. Outside of cryptocurrency, the applications of blockchain technology are immense.
How Does Blockchain Work?
A “block” in the blockchain is akin to a page of a paper ledger. It records some amount of recorded transactions that are then linked to the blockchain’s network. Once linked, the block is effectively immutable.
Blockchain works as follows:
A transaction occurs between two entities (say, a purchase from a website).
- The blockchain network verifies the transaction as legitimate (the network checks the transaction information, including the users, dates, times, amounts, and so on).
- The block stores the transaction, which includes the entities’ digital signatures.
- The network encrypts the block (gives it a ”hash”).
- The network adds the block to the chain and distributes it over the entire network.
What Are the Benefits of Blockchain Technology?
Traditional accounting requires companies to create their own books based on records of transactions. For example, a company selling computer parts would base its books on the transaction receipts of every computer part it has sold.
While this system is undoubtedly effective, it requires the use of (usually expensive) third-party auditors. Outside auditors come in, verify the information, and make a determination as to the accuracy of the books. Ask anyone in public accounting and you’ll get the same answer — audit time is a period of hard work, long hours, and plenty of eyestrain.
Blockchain, on the other hand, removes the need for third-party auditors. Instead of keeping distinct records based on available receipts, companies can maintain “public” registers of their transactions.
Security: Nigh Impossible to Wrongfully Manipulated
By storing transaction data on the chain, the data decentralizes and distributes itself across the entire network. As a result, it becomes exceedingly difficult (almost impossible, to be fair) to alter information on the chain. This prevents data tampering — everyone (or a majority) participating in the chain would need to “agree” to the data change for it to take place.
Bear in mind, blockchain technology only guarantees the security of the data on the network. If falsified data enters the system to begin with, blockchain technology is not a guarantee of legitimacy.
Sound complicated? It is. A free consultation with Founder’s CPA can clear up some of the nuances of this technology.
Transparency: Open, Visible, but Encrypted
The chain (ledger) is open for anyone to view. In order to protect user information and financial data, the chain encrypts each transaction on the network. All users have their own unique digital signature, used to verify a transaction between them and the entire chain.
Speed: No Middlemen
Besides security and transparency, speed is a major advantage of blockchain accounting. A digital ledger of transactions effectively eliminates the need for statement and ledger reconciliation. Instead of spending valuable time reconciling bank statements with business ledgers, companies can keep a single set of constantly audited books.
Blockchain technology also allows companies to verify each other’s financial information almost instantly. Imagine a business acquisition that involves book balancing, statement reconciliation, and analyzing transaction histories. These complicated tasks require significant time and effort. With blockchain employed, the entire process could (theoretically) be as fast as the click of a button.
More realistically, the use of blockchain technology can help reduce the number of third-party middlemen in many business transactions.
Errors: Improving Automation Reduces Human Error
Blockchain accounting is likely to dramatically reduce human mistakes in accounting. With automated systems taking care of the minutiae of data entry, there is less opportunity for human error to creep into the mix. A new technology called “smart contracts” will make many tedious accounting tasks completely automatic. Less human input equals fewer human errors.
What Is Blockchain Accounting?
Blockchain accounting is, as the name implies, a system of accounting that uses blockchain technology. As discussed above, blockchain accounting does not rely on separate ledgers — instead, companies register their transactions in a ledger that creates immutable, self-verifying records.
How Is Blockchain Utilized at the Top Level?
The Big Four accounting firms are no slouches when it comes to blockchain accounting. Now that this cutting-edge technology is finally becoming mainstream, blockchain accounting programs, departments, and services are on the rise.
PricewaterhouseCoopers, for example, now offers blockchain solutions. PWC joined Ernst & Young as the only two of the Big Four willing to accept virtual currencies.
Of course, KPMG and Deloitte both have their own blockchain accounting departments: KPMB has a Digital Ledger Services program, as does Deloitte.
It’s a safe bet to keep an eye on the Big Four. If they embrace blockchain flat out at any point, it may herald a dramatic change in the accounting world.
Is blockchain a disruptive, innovative, and radical new technology? Absolutely. Does that make blockchain the future of accounting? Quite possibly.
But The Big 4 Sound Costly. Is There A Better Option?
A New World?
There’s no doubt that blockchain accounting represents an exciting new set of opportunities for the accounting world. There’s an unfortunate tendency, however, to assume that the growth of blockchain accounting will spell the end for “traditional” accounting.
Instead of ending the world of public accounting, blockchain accounting and its associated technologies can improve existing workflow. As excellent as blockchain technology is at preventing unauthorized access, proper auditing takes significantly more work. The blockchain itself only contains relatively basic information, such as:
- Transaction verification
- Digital signatures
- Transaction dates
Blockchain technology, however, does not necessarily ensure that every record is a proper, legal business transaction. Internal fraud is still a concern, and illegal activities can still occur. Blockchain merely verifies that the transaction is authentic — this does not guarantee that it won’t be fraudulent.
The Future of Auditing?
As blockchain accounting becomes more widespread, auditors face a unique set of challenges and opportunities.
Blockchain accounting requires auditors to delve into transaction classification and record keeping. The digital ledger may show that a transaction occurred between two parties, but complexities can arise. There are few mechanisms in place to allow a CPA to extract information from the blockchain itself, making it difficult to verify transaction classification, which in turn raises issues of fraud or other illegal activity.
Trust and Outside Verification
Outside auditing plays a major role in modern business — and for good reason. An audit breaks down the entire company’s financials and gives it a stamp of approval. Blockchain technology, while highly effective at verifying transaction authenticity, does not currently provide the same level of confidence and trust as a traditional audit.
Independent auditors offer judgments. Financial statement and CPA auditors sign off on a company’s financials when they believe, with reasonable assurance, that they are authentic and without fraud. That’s a vital stamp of approval that blockchain technology, in its current form, cannot give.
Data Complexity
Complicated financial records, transaction histories, financial statements, and business estimates find themselves in hot water when it comes to blockchain. Blockchain accounting is fantastic for relatively simple transactions, but this new technology is not effective at summarizing or calculating complex data.
While this may change moving forward, there is little chance of modern blockchain accounting technology replacing modern financial reporting systems. Instead, blockchain technology will speed up the auditing process.
What About Today’s Auditors, Accountants, and Financial Professionals?
Today’s CPA auditors, financial experts, and accountants are wise to keep up-to-date on developments in blockchain technology. As this new technology becomes increasingly mainstream, it’s likely that it will begin to replace the more mundane aspects of accounting. Bookkeeping, statement reconciliation, and some aspects of financial reporting may find a home in blockchain technology.
However, auditors and other financial professionals will need to focus on higher-level judgment determinations. Data integrity, transaction sources, and smart contracts will likely rise in importance for a future auditor.
Even more intriguing is the possibility of accounting arbitration. Disputes between blockchain users (especially if smart contracts are in play) may require arbitration from a certified professional accountant.
The most likely result in the near future is that blockchain technology will replace the more automated aspects of financial reporting and statement reconciliation. Future auditors, accountants, and financial professionals will focus their efforts on judging high-level decisions and determining the legitimacy of blockchain inputs.
Look to Founder’s CPA
Blockchain technology is at the cutting edge of today’s financial world. It is literally changing the world. Using a professional firm that specializes in hyper-growth startups is smart business decision.
If you’re a blockchain startup or small business, partner with a niche-based accountant familiar with your business. Instead of spending valuable time teaching the intricacies of your business to your CPA, you can get to work right away with a tried-and-true expert.
For blockchain accounting services, consider Founder’s CPA. Side with a group of accountants who have a firm commitment to using modern technology solutions. With years of experience in providing high-level accounting solutions to startups, small businesses, and hyper-growth companies, Founder’s CPA can handle all your blockchain accounting needs.
